Is it Twilight for China?

05/15/2012 6:00 am EST


Jim Jubak

Founder and Editor,

The inflation boost in China in January, which led bears to cry havoc, should just be a blip related to Chinese New Year, says MoneyShow's Jim Jubak, who explains what to watch.

My guest today is Jim Jubak, and we’re talking about inflation in China. So what’s the deal? Every day I hear this: “Oh my gosh, look at the interest rates over there; what’s going on in China? We can never invest there again.”


Is that the truth?

Yes, I wish you would all never invest there again, until I’m done establishing all my positions.

Oh thanks. OK, OK. (laughter)

What we’ve had is this little spooky episode that inflation in 2011 was climbing in China, hitting a high in, as I remember, July. And basically, the Central Bank during that whole thing was raising interest rates and raising bank-reserve requirements to try to slow the economy.

So while that was happening, no one wanted to put money in China. The Chinese certainly didn’t want to put money in their stock market, and China was in a massive bear market.

After that, inflation has gradually come down. It came down to 4.1% in December. What has spooked people is that in January it went back up to 4.5%, and I have only three words to tell those people: Lunar New Year.

And what do you mean by that?

What do I mean by that? OK, so the Lunar New Year is, first of all, lunar, which means that it moves around from year to year. It doesn’t happen in the same month, so last year and this year the lunar New Year is actually in different months, which means that you’re doing a year-to-year comparison that includes or doesn’t include all this economic activity.

Lunar New Year is a tremendous period where companies build stockpiles because they close their factories, so they’re producing like crazy. Big distortions in the supply chain. Families go out and buy all kinds of things. You get massive travel. So all of these things geared for a normal time in China are suddenly experiencing lots and lots of demand, and prices go up.

Basically, the trouble with China right now is that the economic data for January and February basically needs to be thrown out the window; you can’t do anything with it, which means you don’t know what’s going on. All you’ve got are your fears or hopes to operate on.

What we have is a trend that was pushing inflation down, we’ve got a data point in January that says up, and we really don’t know what’s going on. If you want to build a panic on that, be my guest.

But I think what we’re looking at is a year when China, like the United States; like France, is undergoing a transition in political leadership, they don’t want to slow their economy and create a big transition problem for the new leaders. So the likelihood that even 4.5% inflation is going to stay the hand of The People’s Bank, when what’s at stake is the reputation of a new generation of leaders, I think really misreads how politics works—not just in China, but here too.

Sure, but for the individual investor, do you think it’s time for them to look at some of these opportunities in China? And if so, which sectors would you recommend?

What I would do is I would follow intensely the Chinese real-estate stocks. Don’t buy them...and fortunately for that, most of them can’t be bought here; they mostly trade in Hong Kong and nowhere else.

But you want to look at a company like Evergrande (EGRNF), which trades in Hong Kong. It’s the third-largest real-estate company in China. And basically, these are your leading indicators. When these stocks start to go up, you can be sure that the Chinese investing public has decided that The People’s Bank is about to change policy, and the economy is about to rev up again.

So watch those stocks, and at the point where you see those start to build a sustained rally, then you want to look and buy other things in China that are much more...real estate is really, really volatile in China. So at that point, if you see those going up, you then want to look at things like Baidu (BIDU), the big Internet company.

Let’s see what else trades publically, Tencent (TCEHY), which I think trades in the United States; they’re another Internet company. You want to buy some consumer stocks, and at that point are we then going to China; we’ve been looking at it sort of like June, July, and I think that’s still about the right timeframe.

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